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Euro Outlook Clears, Funds Turn Bullish

With political risks in the eurozone receding, investors are becoming more confident in buying Europe’s shared currency.

The US Commodity Futures Trading Commission data showed last week that leveraged funds increased their euro positions to “net long” in the week ended June 13 for the first time in more than three years. The euro is the top-performing Group-of-10 currency versus the dollar this year, climbing more than 6% and set for its biggest annual increase since 2007, Bloomberg reported.

J.P. Morgan Asset Management has increased its exposure to the euro and European equity markets in the past few months, while Western Asset Global Mgmt Ltd., which has been underweight in the shared currency since 2011, began buying it in December and boosted its position through April. Robeco Groep NV, which oversees €150 billion ($168 billion) of assets, said last week it opened a new long position in the shared currency versus the pound.

Emmanuel Macron’s victory in French parliamentary elections, an agreement between Greece and its creditors to release new loans and the defeat of the anti-establishment party Five Star Movement in the local vote in Italy are making investors more confident on the outlook for the shared currency. That compares with earlier in the year, when concerns over the rise of populism across Europe rekindled speculation of a possible breakup of the currency bloc.

“Political risks have reduced in Europe,” said Vincent Juvyns, global market strategist at J.P. Morgan Asset Management, which oversees $1.8 trillion globally. The fund prefers to express its bullish view on euro against the yen. “We had a neutral position on euro and an underweight position on European equity markets at the start of the year which we have been gradually upgrading to overweight over the last couple of months.”

The euro was at $1.118 in London in January. It climbed to $1.129 on June 14, its highest level since Nov. 9.

Bullish Views

“The positioning on euro has improved significantly,” Jeroen Blokland, a money manager at Robeco Investment Solutions in Rotterdam, said last week in an interview. He said he is bullish on the euro versus the pound, while keeping a neutral stance for now against the dollar.

“There was a huge election uncertainty premium in the euro,” Andrew Cormack, a London-based money manager at Western Asset Global Mgmt Ltd, which oversees about $433 billion, said in an interview on June 15. “The long-term fair value for euro is higher than where we are at the moment." He sees fair value for the shared currency between $1.20 and $1.30.

UBS Wealth Management has recently upgraded its euro forecasts as the political risk diminished in the euro region, while Goldman Sachs Group Inc., which abandoned its call for the euro’s parity against the dollar, forecast $1.05 as the “low point” for the pair.

The Swiss bank is more sanguine on its trajectory, expecting the pair to hit $1.14 in three months and $1.16 in a six-month period, while Goldman expects the euro to hit $1.10 at the end of 2018.

Surplus Narrows

The eurozone's current account surplus narrowed in April as the surplus for both goods and services was slimmer than in the previous month, data from the European Central Bank showed Tuesday, MarketWatch reported.

The current account balance stood at a surplus of €22.2 billion in April, following €35.7 billion in March. The balance is a rough measure of the gap between domestic savings and investment. The surplus in goods declined to €25.1 billion in April from €30.0 billion in March, while the surplus in services declined to €7.4 billion from €11.7 billion.

In the 12-month period to April the eurozone's current account surplus stood at 3.2% of gross domestic product, versus 3.4% one year earlier.

The data comes one day after the ECB said the eurozone's large current account surpluses have started to narrow due to an increase in oil prices, which pushes up the price of imports.

Germany's steady trade surpluses have become a major political issue in recent months after a senior adviser to US President Donald Trump accused Germany of using an undervalued euro to give it an advantage over its trading partners. Germany is the eurozone's largest economy.